1.1.2

Question 1

Draw a Tariff diagram (large country) and explain it

Answer 1

• The restrictions on imports reduces the quantity imported.
• Assuming a large country case (i.e. where a country imports a large proportion of total world output), the fall in domestic demand that arises as a consequence of the tariff being imposed, has a significant impact on the world price Pw.
• The lower world price (PW2) and therefore lower price of imports causes an improvement in the terms of trade (ToT) of the monopsonistic importing country.

Question 2

Explain where Price, Quanity Consumed, Quantity Produced Domestically, Quantity imported, consumer surplus, producer surplus, governmetn revenue, deadweight losses were before and after tariff

Answer 2

Question 3

Drawbacks to the tariff?

Answer 3

• How do you measure the optimal tariff? Lack of info to calculate accurately.
  Risk of retaliation & trade wars -> LR consequences of a breakdown in trade relations.
  Negative impact on domestic consumers still via higher price.

Question 4

Brief summary of the monopsonistic state arguement

Answer 4

• In the case of a monopsonistic state (where a country accounts for a large proportion of total demand for a particular product), it is possible that the positive terms of trade effect (the welfare gain from forcing foreign producers to accept a lower price for their product as the monopsonistic state has the capability to reduce the world price for the product) can outweigh the losses from the productive and allocative inefficiencies resulting from a tariff.

Question 5

What is a Tariff

Answer 5

• A tax that raises the price of imported products and causes a contraction in domestic demand and an expansion in domestic supply (e.g. import or custom duties).
• For example, until recently, Mexico imposed a 150% tariff on Brazilian chicken.The United States has an 11% import tariff on imports of bicycles from the UK.

Question 6

Draw a tariff diagram for a standard small country

Answer 6

Question 7

Explain where Price, Quanity Consumed, Quantity Produced Domestically, Quantity imported, consumer surplus, producer surplus, governmetn revenue, deadweight losses were before and after tariff (small country)

Answer 7

Question 8

Analysis (impact) and Evaluation for Domestic Producers - Small country

Answer 8

Analysis:

Producers benefit initially from an import tariff - they are protected from lower priced imports and can expect an increase in output at a higher price, which increases their revenues and operating profits.

Evaluation:

Possible X-inefficiencies because of reduction in intensity of market competition. Other producers affected e.g. A tariff on steel raises the cost of car and construction companies.

Question 9

Analysis (impact) and Evaluation for Foreign (overseas) producers - Small country

Answer 9

Analysis:

Import tariff is a barrier to trade and squeezes demand leading to lower revenues and profits.

Evaluation:

Producers may be able to shift production / exports to countries or regions where import tariffs are lower.

Question 10

Analysis (impact) and Evaluation for consumers - Small country

Answer 10

Analysis:

Consumers face higher prices after the tariff - leading to a fall in real incomes. May affect lower income households more - regressive?
Loss of consumer choice (lower utility)

Evaluation:

Impact on demand depends on the price elasticity of demand for the affected product. Tariffs on essential items such as foodstuffs tend to have a lower price elasticity of demand.

Question 11

Analysis (impact) and Evaluation for Government - Small country

Answer 11

Analysis:

Government tax revenues rise initially from having import tariffs - rising GDP and increasing profitability of suppliers

Evaluation:

Adverse effects of possible retaliatory tariffs on other industries. Slower economic growth from higher inflation.